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Competitive Pricing in Markets with Different Overhead Costs: Concealment or Leakage of Cost Information?

Eddy Cardinaels (), Filip Roodhooft, Luk Warlop and Gustaaf van Herck

Journal of Accounting Research, 2008, vol. 46, issue 4, 761-784

Abstract: This paper experimentally investigates how leaders and followers in a duopoly set prices for two product markets that have different overhead costs. In a fully crossed two‐by‐two design, we manipulate the participants' private cost report quality as either low or high, representing the extent to which these reports reveal that product markets have different overhead costs. We show that when only the leader is given a high‐quality cost report, private cost information of higher quality is better incorporated into market prices (that are observable to participants). Both the leader and follower improve in profits and their prices better reflect the differences in overhead costs because the follower infers information from the leader's prices (information leakage). In contrast, when only the follower receives a high‐quality cost report, the leader's profits and prices do not improve. This occurs because the follower conceals cost information when the leader has a low‐quality cost report.

Date: 2008
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Journal of Accounting Research is currently edited by Philip G. Berger, Luzi Hail, Christian Leuz, Haresh Sapra, Douglas J. Skinner, Rodrigo Verdi and Regina Wittenberg Moerman

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